Since late 2013, international bond markets have been offering an unusual and rare arbitrage opportunity between developed and emerging market (EM) corporate bonds. Currently, as EM issuers, as rated by Standard & Poor’s, display a more stable rating compared to their European and US peers, by switching from BB rated eurozone bonds to BBB rated EM bonds, investors can not only reduce their credit risk significantly but also take advantage of a 98 bp spread (as of early May 2014).
Furthermore, EM corporate bonds have performed well in the year so far, shaking off various adversities including the on-going dispute between Russia and Ukraine, domestic political turmoil in Venezuela and somewhat jittery stock markets. Both investment-grade and high-yield rated bonds are in positive territory and the pick-up in primary market activity attests to sustained market momentum. Corporate bond spreads in EMs continue to trade at historically high levels compared to those in developed markets with similar ratings and maturities, which will probably attract further inflows into the asset class.
EM corporate bonds enable investors to get exposure to the superior EM growth story with a similar credit risk to that of developed market corporate bonds, all the while providing efficient diversification within a developed bond portfolio. In addition, they offer higher yields and better compensation for risk than similar developed market corporate bonds in the current low interest-rate environment.
UBP currently offers different EM corporate bond strategies: a traditional global one, one focused on investment grade, and a short-duration and high-yield one. The latter two strategies apply a traditional bottom-up bond-picking approach with the aim of offering the highest yield for a given level of risk.
UBP’s EM investment-grade corporate bond strategy has consistently outperformed its benchmark (JPMorgan CEMBI Diversified) since its launch on 1 December 2011, offering an annualised return of 7.67% compared to 7.14% for the index. In the second half of 2013, just as EMs suffered from higher volatility and the sharp US Treasury curve-steepening, the strategy offered investors a positive performance.
Managing around USD 2.9 bn in assets as at the end of March 2014 (up 48% from end-2012), UBP’s EM Fixed Income team comprises eight investment specialists and has resources dedicated to credit research, risk management and trading. They are active managers and oversee the entire spectrum of global EM fixed income (sovereign, corporate, local currency).
The information and opinions contained herein were prepared by Union Bancaire Privée, UBP SA (hereinafter, “UBP”).
The information herein was obtained from various sources and is believed by UBP to be reliable but UBP makes no representation as to the accuracy or completeness of such information. Opinions, estimates and projections in this document constitute the current judgment of the author as of the date of this document and are subject to change without notice. UBP has no obligation to update, modify or amend this document.
This document is provided for information purposes only. It is not to be construed as an offer to buy or sell or solicitation of an offer to buy or sell any financial instruments or to participate in any particular trading strategy in any jurisdiction. The financial instruments discussed in this document may not be suitable for all investors and these materials should not be regarded by recipients as a substitute for the exercise of their own judgment. Investors must make their own investment decisions using their own independent advisors as they believe necessary and based upon their specific financial situation and their investment objectives. Investors should be aware that foreign exchange rates may have a negative effect on the price or value of, or the income derived from, an investment denominated in a foreign currency. Furthermore, past performance is not necessarily indicative of future results.
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About Union Bancaire Privée (UBP)
UBP is one of Switzerland’s leading private banks, and is among the best-capitalised, with a Tier I ratio of 29%. The Bank is specialised in the field of wealth management for both private and institutional clients. It is based in Geneva and employs about 1,350 people in some twenty locations worldwide; it held CHF 87.7 billion (USD 98.6 billion) in assets under management as at 31 December 2013.
- Corporate bond
Jérôme Koechlin, Tel: +41 58 819 26 40
Head of Corporate Communications